The following question is from Charlie about in-kind RRSP contributions:
Let’s say I’ve bought a US dividend-paying security outside my RRSP with US dollars. Can I then transfer it to my RRSPs so that any subsequent dividends will not be taxed? If so, how does one track exactly how much RRSP room they have used since it is in USD? Is it on the original purchase price of the security or the current price at time of transfer?
Yes, you can contribute a US stock from your investment account into your RRSP. Subsequent dividend payments will be converted to Canadian dollars and deposited into your RRSP account. There is no withholding tax by the IRS (since the stock is now within a RRSP) and no Canadian taxes.
When you call in to contribute in-kind, the broker will use the closing price for the stock for the last trading day and use the exchange rate in effect then. For example, let’s say you are contributing 100 shares of XYZ Inc, which closed yesterday at $40 (US). Let’s assume that the 1 USD buys 0.95 CAD. The book value of your contribution will be [100 * 40 * 0.95] $3,800 and that’s the RRSP room you’ve used up.
Please note that when filing your taxes for this year, you’ll have to report the profits on XYZ Inc. as capital gains. In the above example, if you purchased XYZ Inc. at $25 at the same exchange rate, you’ll have to declare capital gains of [100 * (40 – 25) * 0.95] $1,425.
Warning: Do not contribute in-kind stock in which you have a significant capital loss because you cannot claim a capital loss on a in-kind contribution to your RRSP. When you have a capital loss, it is better to sell the stock in your investment account and purchase it immediately in your RRSP account. These transactions are not considered a “wash sale” and would allow you to claim a capital loss when filing taxes.